Cornered in the Corner Office

Hopefully, the current crisis will encourage thoughtful reexamination of even the most politically difficult policy reforms.

The last time Jerry Brown was in charge of the Golden State, he was dating Linda Ronstadt, there was no 24/7 news cycle and the Internet was nothing but a twinkle in Al Gore's eye. The last budget he oversaw was for about $25 billion dollars.

My, how things have changed. When Jerry Brown takes office in January, he'll be looking at a budget that is about $25 billion in the red.

Given the Republican takeover of the House, don't even bother thinking about a federal bailout. So what are state leaders going to do? Here's a suggestion: Consider fundamentally transformative changes to how the state conducts business, including reforms to pensions, various forms of privatization and changes to public employee pay and benefits.

A good place to start would be a careful review of the National Governors Association's issue brief on State Government Redesign Efforts, 2009-2010, released last month. According to the report, "At least 15 states conducted government wide efficiency reviews to identify areas of state government that can be made more efficient and less costly; at least 18 states have reorganized agencies; and more than 20 states have altered employee compensation, including enacting pension reforms."

Public employee and retiree health benefit costs are an area that legislatures have been reluctant to address, but one that the current crisis is bringing to the fore.

The report notes that "Indiana found that its public schools and universities could realize at least $450 million in savings annually by transitioning into the state employee health insurance program." In Massachusetts, a measure that would have allowed municipalities to alter health-care benefits without collective bargaining, could have saved cities and towns $100 million annually. The bill failed in the Legislature last summer, but expect to see the issue rise again, since Massachusetts is facing a $2 billion shortfall of its own.

The National Conference of State Legislatures (NCSL) has some interesting data on the design and cost of state health benefits. According to the NCSL, nearly all full-time state workers were eligible for health-care coverage (97 percent), and opt-in was extremely high, averaging 91 percent. This is an indication that where two spouses have coverage options, the state worker's plan is more attractive.

In 2009, states payed an average of $447.79, or 89 percent, of an employee's individual plan. There were 14 states that paid for 100 percent of an employee's basic or "standard" health plan and seven states that paid for 100 percent of the "defined standard" premiums for at least some families of state employees. This sort of benefit level is extremely rare in the private sector, to say the least. In addition, the NCSL found that 74 percent of part-time state employees had the option of electing for health benefits, compared to 48 percent nationally.

Can elected officials really ask taxpayers in the private sector to deliver benefits for public workers that exceed anything available in the private sector? As the Massachusetts Taxpayer Foundation's Mike Widmer put it, "Municipalities are the last bastion of the $5 copay."

Pension reform is another sacred cow that is coming under scrutiny. The National Governors Association found that since 2009:

[At least] 18 states had reformed some aspect of their pension systems, including reducing benefits for future employees. States such as Arizona, Colorado, Iowa, Minnesota, Mississippi, Montana, New York, Pennsylvania, Vermont, and Wyoming increased contribution rates to the state retirement system for all or some current employees… Utah has closed its defined benefit plan to new workers entirely. Arizona, Illinois, Missouri, New York, and Pennsylvania have raised the requirements for current employees to retire. In Illinois and Missouri the retirement age is now 67.

Most observers are aware that California has some of the most generous public employee pensions and benefits in the nation. Like many states, the choices in California are increasingly grim. Reform isn’t the only alternative, of course, but all possible paths have their risks. If you increase taxes, unemployment could worsen. Maintain benefits, and you risk massive layoffs to education and public safety. Of course, trying to change pay and benefits for public workers isn't just politically difficult, it can also depress morale and make recruiting strong employees more difficult. There are no easy answers out there.

A number of governors will start 2011 with fiscal situations that are beyond grim. Here's hoping that the current crisis will encourage thoughtful reexamination of even the most politically difficult policy reforms.